Costa Rica: How Tax Reform In Costa Rica Will Affect Your Business

The tax laws in Costa Rica are changing and it is important to
know and understand the new obligations so your business remains
compliant when operating in the country.

The tax laws in Costa Rica are changing and it is important to
know and understand the new obligations so your business remains
compliant when operating in the country. Costa Rica's tax
reform law is called "The Law on Strengthening Public
Finances" (Law #20.580) and will fully come into effect
starting on 1 July 2019. This law contains four parts made up of
two laws with the goal of helping to increase revenue and the other
two are intended to manage costs for the country.

The four parts are:

a change from general sales tax to
Value Added Tax (VAT)

new income tax law that includes
capital revenues

modification of public administration
salaries

fiscal responsibility laws

General sales tax to VAT tax

The current sales tax rate in Costa Rica is 13% and it only
applies to a limited number of products. Changing to a Value Added
Tax will cover products and services. The general tax rate will
remain at 13% while there will be a 4% tax on airline tickets and
healthcare services. A 2% tax will be levied on medical products,
raw materials and machinery used for production, insurance
premiums, purchase and sale of university issued products. Basic
food necessities from a specific list will be charged a 1%
tax.

There are some exceptions that will not be charged the 13% VAT.
These include, but are not limited to:

electricity consumption of less than
280 kW / h;

water consumption less than 30 cubic
meters;

exports of goods and sales of goods
or services for free trade zones;

commissions paid to complementary
pension operators;

rental of housing where the rental
amount is less than the equivalent of 1.5 base salaries (646,000
Colones);

Orthopedic equipment, rehabilitation
and wheelchairs;

the goods and services provided or
acquired by the Red Cross, the Costa Rican Fire Department, the
Association Works of the Holy Spirit, the Earth University, the
Boards of Education, the Community Development Associations and the
Asadas;

Enrollment in public universities and
private education;

internal advertising space of radio
and television programs;

interest and fees for loans and
credits;

books in any of their formats;

the fees and monthly payments of
professional associations;

premiums for labor, agricultural and
social interest housing;

services of livestock auctions;

care and elderly care networks,
etc.

The VAT will also apply to all service providers like, lawyers,
doctors, engineers, dentists, accountants and others. Previously,
companies that provided services did not file and pay sales tax but
they will now have to comply with the new tax rates.

Income tax law changes

There are many intricate amends to the income tax laws in Costa
Rica. Below, are some of the changes businesses will have to adhere
to under the new law.

A new capital gains tax is being introduced with a rate of 15%.
Shareholders that make capital contributions will have them taxed
as well as the returns of capital when the company has retained
earnings. The tax on interest from investment certificates will
increase from 8% to 15%.

Another change will affect non-domiciled individuals or legal
entities that own real estate in Costa Rica. When selling the
asset, they will be subject to a 2.5% withholding tax.

There are four newly created tax brackets, two for legal
entities and two for individuals. These will affect legal entities
that do not generate more than C106.000.000 (approx. US$188,000) of
gross income during the fiscal year and taxpayers with salaries
higher than C2.103.000 (approx. US$3700).

The tax reform laws will create a Capital Gains tax of 15% that
applies to real estate and investment income.

A big change that will affect all taxpayers is the move to a
calendar-based tax year. Instead of the current tax year ending on
September 30th, it will now run from January through December.

Modification of public administration salaries

This section of the tax reform is the start of cost containment
measures for the public sector. It will limit incentive pay and
bonuses for employees in the public sector with the goal of
improving public finances. The limits will be 25-30% for those with
master's degrees and 10-15% for bachelor degrees. In the past,
these increases could go as high at 60%. Employees will also only
receive a pay increase tied to performance-based reviews as opposed
to automatically receiving annual pay increases. Lastly, there will
be a cap of 8 years' worth of wages for a severance payment, if
the employee is terminated without cause.

Fiscal responsibility

This section of the law creates a limit as to how much
government expenditures can increase. This will help to contain the
government spending while tying it to economic growth. If there is
no growth, then the country cannot support the spending.

While no one likes increases in taxes, these reforms are
necessary to help the country become more competitive in the
future.

Staying compliant

When the new tax laws come into effect in July 2019, your
business will have to understand how to maintain compliance.
TMF Costa Rica has the experience in supporting all aspects of
opening and running a business in Costa Rica and are the experts
when it comes to tax compliance services.
Find out how we can help your business navigate the tax
changes.

Colin Singleton, Principal National Transaction Services; Leo Chomiak, Partner International Tax Services; Faisal Haque, Principal National Transaction Services; and David Balaban, Director International Tax Services will give insights on international and domestic Transaction Lifecycle Solutions that help create, protect, and transform value including buy/sell side due diligence and M&A tax due diligence.

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